An American Perspective from China

The KFC Index

Monthly inflation figures are due out tomorrow from the Chinese government, which will no doubt provide plenty of fodder for the debate over whether China’s economy faces greater danger from overheating or from a renewed slowdown. The government has made it quite clear that its target is to keep consumer (CPI) inflation capped at 3% this year. And, wouldn’t you know, a whole parade of official sources, from the NDRC (China’s central planning honchos) to the PBOC (its central bank) have issued statements over the past few weeks predicting — with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck — that inflation will come in right at 3% this year (per Reuters, “the National Development and Reform Commission said a growing number of factors, which it did not enumerate, would help to stabilise prices over the second half of the year.”)

None of this was particularly on my mind when I walked into my local KFC today, in Beijing, to grab lunch. I always order the same thing at KFC: large popcorn chicken, small fries, and a large Pepsi. Okay, so it’s not original, but it makes for a consistent benchmark. So it’s been subtly obvious to me for some time that the prices have been going up.

How much? Well, according to official Chinese statistics, food inflation (a component of CPI) this year has been running at about 5-6% — higher than the rest of the consumer price basket, to be sure, but not high enough to tip the balance.

How does my KFC experience in Beijing compare? A year ago, my standard meal cost RMB 21.50. A couple of months ago it rose to RMB 25.50. Today, for the first time, it set me back RMB 28.50. For those keeping track, that’s a 32.6% price hike in a single year.

There’s nothing scientific about this sample. It’s purely anecdotal. Perhaps KFC, or the Beijing market, is an aberration (I’m eager to hear anyone’s theories). But I think it’s a data point worth noting, such caveats aside. KFC isn’t some outlier in the Chinese economy, like high-priced Starbucks that still caters mainly to young, cosmopolitan latte-sippers. KFC is incredibly popular with the laobaixing (the “common people:), who find chicken — especially the localized versions offered at KFC — far more familiar and appetizing than either coffee or burgers. It outnumbers McDonald’s 2:1, with over 2,000 outlets and a reach that extends far into 3rd and 4th tier provincial cities. In China, KFC may be higher end than most, but it’s definitely mass market.

I’m not questioning the validity of China’s official figures based on one lunchtime order. But it’s important to remember that inflation is a psychological as much as a statistical phenomenon, its impact largely a function of consumer perception. My perception, as a consumer looking at one reasonable benchmark, is that 3%, or even 6%, is way below the effect higher prices seem to be having on the Renminbi in my wallet.

If you really want a picture of how inflation is impacting local food prices, you’d get a far more accurate picture by evaluating small, locally-owned restaurants (three table noodle joints; two table dumpling joints, whatever) where the owners are directly exposed to the prices being marked up at, say, the local wet market. Put differently, the number of Chinese able to afford, on a regular basis, an RMB 28.5 meal at KFC are outnumbered – by hundreds of millions – the number of people only able to afford RMB 2 bowls of noodles offered on street corners.

In any case, Yum, Inc – KFC’s parent company – doesn’t source exclusively in China, and its pricing not only reflects global trends (they by from ag conglomerates whose prices reflect int’l commodity markets) but also their ability to nudge the upper end of the laobaixing – an edge that includes tens of millions of people, but an edge, nonetheless.

Rather than evaluate inflation on the basis of KFC outlets in relatively wealthy parts of Beijing, why not go out from the city and take the measure of food prices in place that don’t have/can’t afford KFC – ie, most of China.

The advantage of KFC over three table dumpling shops is that KFC will keep consistent ingredients. I remember in 2007 when pork prices suddenly increased, as well as higher prices at three table dumpling shop there was less meat inside each dumpling and eventually some shops started offering 5 dumplings instead of six.
Does anyone have any data on Big Mac prices to compare?